Gokhale Institute of Politics and Economics

(Deemed to be University u/s 3 of the UGC Act, 1956)

Pune 411 004
M.Sc.(Financial Economics) 2021-2023
Semester:- February –July 2022
Online Semester End Examination July 2022
FE-A-106: Corporate Finance and Capital Budgeting
Wednesday Time: 02.30 p.m. to 05.30 p.m.
July 13, 2022 Max. Marks: 60

Q.1 From the following, prepare Cash Budget for the period Sep 2000 to Nov 2000 (8)

Month Sales Materials Wages Overheads

` ` ` `
July 60,000 32,000 12,000 6,500
Aug 55,000 40,000 10,000 5,000
Sep 75,000 50,000 22,000 7,000
Oct 80,000 55,000 30,000 8,500
Nov 1,00,000 60,000 40,000 9,600

i. 20% sales are on cash basis and credit sales are collected in the second
month from the month in which sale occurs
ii. Credit terms are as follows –
Materials - 1month, Wages 1/4 th month and overheads 1/2 month
iii. 12% Loan of ` 1,00,000 will be taken on 1st Sep , which will be repaid
on 30th Nov along with interest.
iv. Maturity proceeds of Investment ` 50,000 will be received in November
v. Advance Tax of ` 10,000 will be paid in Nov.
vi. Opening cash balance as on 1st Sep 2000 will be ` 20,000

Q.2 A company is going to raise Rs 60,00,000 for which following are the proposed
plans for capital structure –

Plan Equity 12% Debentures 13% Preference shares

` ` `
I 60,00,000 - -
II 30,00,000 30,00,000 -
III 30,00,000 - 30,00,000

Corporate tax is 30% . Equity shares of ` 10 each will be issued at par. EBIT
after raising the required funds will be ` 22,00,000

Calculate –
i. EPS for each Plan (6)
ii. Financial Break Even Point for each Plan (3)
iii. Financial Indifference points between Plan I& II , Plan II & III and Plan
I & III
1
 (6)

Q.3 Following are the details for a company –

Net Profit after tax - ` 82,50,000
Outstanding 10% Preference Shares of ` 10 each - ` 25,00,000
The company has Equity share capital of Rs 80,00,000 divided into shares of `
10 each
Return on Investment is 30% and Cost of equity is 15 %.
a. What should be the Retention Ratio so as to keep price at ` 120 as per (5)
Walter's model ?
b. What is the optimum dividend payout ratio as per Walter's model ? (2)
c. Calculate share price at optimum dividend payout ratio (3)

Q.4 Following is the data relating to a company –

Per unit
(`)
Selling Price 120
Variable Cost 50

At present the company produces and sells 5,000 units. Fixed cost per unit at
this activity level is ` 10. The company has 10% Debentures of Rs 1,00,000
and 10% Preference shares of ` 50,000 in its capital structure. Tax rate is 30%
i. Prepare income statement (4)
ii. Calculate –
a. Operating Leverage (2)
b. Financial Leverage (2)
c. Combined Leverage (2)

Q.5 A company has following capital structure as on 31/03/2005

Particulars ` (Lakhs)
Equity Share Capital 10
(1,00,000 Equity shares of ` 10 each)
Reserves and Surplus 1
10% Debenturs of ` 100 each 2
(Redeemable afer 3 years)
Total 13

For the year ended 31st March 2005, the company paid equity dividend at 10% .
Expected growth rate in dividend is 6% p.a. Market price per equity share is `
20. Corporate tax is 30%.
Calculate –
i. Cost of Equity capital

2
 ii. Cost of 10% Debentures (2)
iii. WACC by taking book values as weights (2)
(3)

Q.6 Modern Construction Company has received a proposal from Central Govt to
build 10 kms road. Market value of land on which the road will be built is Rs 50
lakhs. Funds required for construction are as follows –

`
Plant and Machinery 10,00,000
Cost of construction 5,00,000
Initilal working capital 1,00,000

The road will be leased out to the Central Govt for 5 years after which, it will be
transferred to the Central Govt. for a nominal amount of Rs. 1,00,000. Cost of
Plant and Machinery will be written off over 5 years and actual salvage value at
the end of 5 years will be Rs. 10,000. Cost of construction will be also written
off over 5 years and the same will be allowed for tax purpose. Tax rate is 30%
and Cost of Capital is 10%
Lease rentals to be charged will be as follows –

Year Lease Rentals

1 Normal
2-3 110% of Normal
4-5 120% of Normal

Calculate –
i. Cash flow at the end of 5th year on account of sale of Plant and (3)
Machinery
ii. Minimum Lease Rental to be charged in 1st year (7)

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